Saturday, June 25, 2011

Wow! Many of you are very publicly wrong about bitcoins. I do appreciate your enthusiasm in publicizing this potentially high-impact new technology, but hey - get it right! After seeing many articles and blog posts with these mistakes, I decided to point them out. Please look for my mistakes, and point those out to me too.

5. Myth: Bitcoins are in deflation.

Survey says? Nope!
Bitcoins are currently being created at a rate of ~50 BTC every 10 minutes. This works out to about 2,600,000 BTC created in a year, or about 40% annual inflation. That's right, the bitcoin supply is inflating now, probably faster than the USD. It is true that some people lose their keys, effectively removing their bitcoins from circulation (a deflationary pressure). This deflation may eventually be larger than the amount of new bitcoin creation (which is set by the network to decrease over time). However the rate of bitcoin creation is today larger than this deflation. The bitcoin network manages inflation in an open and public way, one of its advantages over other systems of currency. Bitcoins have experienced an increase in price despite this inflation. An increase in price due to increased demand is not the same thing as monetary deflation!

4. Myth: Bitcoins are going to put banks out of business.

Where are you getting this? Bitcoins are a valuable commodity. With this commodity are associated numerous financial services. Would you pay a small fee to have your fortune well protected? Have you ever considered taking a loan out and paying interest on it? Perhaps you see where I am going here with this one. New banks are being created around bitcoins and old banks are also jumping on the bitcoin-wagon. As they do, people will flood in for the security and service, and pay fees. It's scary and dangerous holding a lot of cash, gold, USD or BTC. The bitcoin may have the potential to change the banking industry for the better; many banks will profit in a variety of ways on this new technology.

3. Myth: Bitcoins prevent fractional reserve banking.

Not quite. Remember, fractional reserve banking rose around another commodity of limited supply: gold. There is nothing to prevent me from issuing promissory notes for bitcoins which I don't have, or loaning out funds (BTC) which other people think I am holding secure for them. Bitcoins do however prevent counterfeiting and unchecked inflation, which are not quite the same as fractional reserve banking.

2. Myth: Bitcoins are more anonymous than US dollars.

Pfffft. Take a look at a hundred dollar bill. Do you see a creation date of the funds by the federal reserve (note that this is different than the paper bill date) and/or a public key associated with it? Do you see a ledger of keys, dates, amounts, of all transactions that the value of that dollar has been involved in? Do you need an IP address to spend that hundred dollar bill? With bitcoins, you have all these things (and more) potentially revealing your identity.. and you can also see all these things for all the other bitcoins in circulation! With the Benjamin, you have none of this. Now tell me: which is more anonymous?

1. Myth: Bitcoins are untraceable.

Uh.. come again? Bitcoins are the most traceable currency ever developed. Take a look at the bitcoinmonitor or the block explorer. Ever see anything like that before with any other currency? Every coin can be traced back to it's creation and through all it's chain of owners' public keys. Yes, it is true that there are ways to obscure your tracks.. just as there are for US dollars.

Honorable mentions:

Myth: Bitcoins are untaxable

Nice new car you have there. Did you tell me and my powerful friends about it? Do you see my heavily armed and uniformed gang? Pay up. Note that the USD is also "untaxable" provided you can hide it from the tax man.